The market doesn’t appear to like the business updates from Aurora Cannabis (NYSE:ACB), but the cannabis company continues to transform the business for long-term profitability. Considering not all of the updates were positive, the stock dropping to recent lows below $8 isn’t surprising. My investment thesis remains more bullish on the cannabis stock now.
Image Source: Reliva website
Negative Business Updates
The biggest concern from the business updates was the financial targets pushed out, yet again. The company has disappointing revenue and EBITDA forecasts while suggesting cost cuts are on target and headed towards major improvements.
Aurora Cannabis now forecasts being adjusted EBITDA positive in FQ2’21 or the December quarter. The previous forecast was the September quarter after the cannabis giant had originally forecast a goal in mid-2020 that never materialized.
The big reason for the EBITDA hit was revenues missing targets. Aurora Cannabis now has FQ4 revenues dipping to C$71.0 million, down from C$75.5 million in the prior quarter. The forecast was for sales growing slightly sequentially.
The biggest problem in the Canadian cannabis sector has seen a consistent inability to provide accurate financial targets as the market shifts. While the Canadian cannabis market continues to grow, the leaders in the sector have struggled to grow revenues with Aurora Cannabis originally reaching nearly C$100 million in quarterly sales back in FQ4’19.
The other major disappointment for the market was the promotion of recently announced COO to the CEO role. Executive Chairman Michael Singer had become the interim CEO since early February when founding CEO Terry Booth left the company.
The market had liked the rumor of merging with Aphria (APHA) with their CEO taking the helm of the combined entity. This promotion suggests any industry consolidation will require these bigger companies to acquire smaller firms, and Aurora Cannabis probably isn’t in any position for an acquisition here.
The other non-news is the gigantic C$1.6 billion to C$1.8 billion write-down of goodwill and intangible assets. The charge is non-cash, and investors have long known these goodwill and intangible assets listed at a combined C$2.9 billion on March 31 had limited valued. The table suggests the current C$4.7 billion total asset balance will drop to somewhere around C$3.0 billion. The amount actually still appears high with goodwill and intangible assets of over C$1.1 billion.
Source: Aurora Cannabis FQ3’20 financial statements
Positive Business Moves
The market doesn’t like the promotion of Reliva CEO from the current role of Aurora Cannabis COO to the full-time CEO. His experience, though, speaks to an excellent background in the U.S. CBD business, along with being the SVP and GM of Altria (MO) Sales & Distribution.
His hiring comes after Aurora Cannabis has already transformed the business. While the company forecasts FQ4 operating costs in the low C$60 million range, the business has a current quarterly run rate in the low C$40 million range. The costs are now down over 60% from the highs.
The costs will improve going forward with the termination of the absurd UFC deal. Aurora Cannabis will pay C$30 million in the current quarter to avoid more than C$150 million in future fees. The amount suggests the cannabis company signed a horrible deal costing around C$30 million per year in research and marketing expenses at a time that the company only generates an equivalent amount in quarterly gross profit. Clearly, the UFC deal provided nowhere close to the sales to match these costs.
Speaking of gross profit, the company guided to FQ3 gross margins in the 46% to 50% range due to weak non-cannabis business margins. Regardless, the company continues to generate solid gross margins despite struggling to grow revenues for well over a year now.
With 50% gross margins and quarterly operating expenses in the C$40 million range, Aurora Cannabis only needs revenues in the C$80 million range to generate operating profits. With a level of depreciation expenses, the cannabis company shouldn’t need any extensive sales growth to turn EBITDA profitable.
The biggest question is whether new CEO Miguel Martin can use his experience in the consumer packaged goods industry to drive more consistent growth. He has been with the company for months now, having closed the Reliva deal back in May, so the company won’t have to incur a learning curve for the next 6 months as a typical new CEO learns the ropes of the business.
The amazing part is that Aurora Cannabis now trades below a market cap of $900 million while sales are running at a rate of $215 million. The company might have a difficult time reaching the current $300 million revenue target for FY21, but the stock becomes appealing on a valuation of ~3x sales estimates here.
Unfortunately, the stock needs to wash out first before buying here. The recent low of $5.30 is clearly a possibility as well as a great entry point.
Takeaway
The key investor takeaway is that Aurora Cannabis continues to report mixed corporate updates. With the stock taking a 10% hit, the good outweighs the bad at these lower valuations. Investors should definitely wait for the stock to wash out before buying, but the cannabis company is now poised for a long-term path to profits with a solid CEO in charge and the business transformed.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ACB over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
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